J. Front Retailing Co., Ltd. (3086) Earnings Call Transcript & Summary

Thank you very much for attending today despite your busy schedule. Please go to Page 1. Today, I'll give you an overview of results for the first half of fiscal year 2021 and explain forecast for the second half and through fiscal year 2021 and progress the medium-term business plan. Please turn to Page 3 for results for the first half of fiscal year 2021. Consolidated gross sales of J. Front Retailing were JPY 402.1 billion, up significantly by 25.4% year-on-year. Consolidated business profit was JPY 3.6 billion, up JPY 3.4 billion. On the other hand, operating loss improved significantly year-on-year from loss exceeding JPY 20 billion. However, due to impacts of COVID-19, such as request to close department stores and PARCO and short-term business hours, operating loss was JPY 1.3 billion and loss attributable to owners of parent was JPY 1.9 billion. Gross sales were JPY 12.8 billion below June forecast, mainly due to the impacts of the fifth wave of COVID-19 since late July. On the other hand, business profit was JPY 100 million, up June forecast due to success of further review of SGA at group companies, partly due to subsidies for employment adjustment and assistance fund associated with store closure, operating loss was JPY 1.1 billion better and loss attributable to owners of parent was JPY 1 billion better than June forecast. We increased interim dividend by JPY 5 year-on-year to JPY 14 per share as planned. Please go to Page 4 for segment performance. Department store business started to show a sign of steady recovery from the impact of COVID-19 in the beginning of this fiscal year. However, due to the fourth wave of COVID-19, which started in April, we were forced to close stores from late April to some days in June and challenging management environment lasted. As the infection spread rapidly at an unprecedented speed in the fifth wave from late July, flow of people was limited. Besides the media reporting outbreak at department stores led to deterioration of sentiment and local governments request to restrict admission. Also due to unseasonable weather, speed on recoveries led down further in the latter half of the second quarter. As a result, gross sales increased only 27.7% year-on-year. Business loss was JPY 1.4 billion. Operating loss was JPY 4.7 billion, also due to impacts such as reclassification of fixed cost because of suspension of store operation. Page 5 shows growth rate of quarterly sales of Daimaru Matsuzakaya Department Stores, major stores in comparison with fiscal year 2020 and 2019. Sales improved 10 to 20 points from the first quarter to the second quarter compared to fiscal year 2019, but recovery slowed down due to the first wave of COVID-19. Stores such as Kobe and Nagoya stores that have strong regular customers, such as gaisho customers recovered steadily. However, Tokyo and Umeda stores that heavily depend on railway passengers remained relatively sluggish. Please turn to Page 6. SGA increased JPY 7.6 billion year-on-year due to the rebound from reclassification of fixed cost, such as personnel expenses, depreciation and computer expenses during suspension of operation from April to May last year as well as increased variable cost associated with expansion of business opportunities. However, SGA decreased JPY 10.5 billion from fiscal year 2019. Page 7 shows SG business. PARCO stores were also forced to close or reduce business hours for a certain period due to declaration of state-of-emergency and priority preventative measures, rent concessions were partially provided as a result recovery was slower than our original expectation. Besides entertainment business didn't achieve expected results due to continued restrictions on attendance, business hours and offering food and drink. As for Neuve A operating specialty store business with sluggish performance, all the shares were transferred at the end of June from the viewpoint of selection and concentration of businesses. Consequently, revenue only increased 15.5% year-on-year, but business profit was JPY 2.7 billion, partly due to a reduction of SGA associated with the share transfer of Neuve A. Operating profit turned positive to JPY 400 million partly due to the rebound from the impairment loss booked in the previous year. Please go to Page 8 for Developer business. J. Front Design & Construction changed revenue recognition method from cost recovery method to percentage of completion method. Partly due to the impact of the adjustment, revenue was down significantly by 21.7%. However, business profit was JPY 1.7 billion, almost flat year-on-year. Operating profit slightly increased to JPY 1.8 billion, but was JPY 300 million below June forecast, mainly due to delay in planned sale of real estate properties. Page 9 shows Payment and Finance business. Recovery of transaction volume was lower than expected mainly due to temporary closure of Daimaru Matsuzakaya Department Stores. However, transaction volume improved steadily due to an increase in affiliated store fees and annual membership fees and revenue increased 7.8%. Business profit was JPY 400 million, and operating profit was JPY 500 million. Business profit and operating profit was above June forecast, respectively, partly due to reduction of SGA. Page 10 shows other segment. Revenue increased 9.8% driven by Daimaru Kogyo, first sales of automotive fares were strong and impose on which impact of COVID-19 was improved from the previous year. Business profit decreased as margin deteriorated significantly at Daimaru Matsuzakaya Sales Associates as a reaction to the significant reduction of costs associated with reclassification of fixed cost during suspension of operation in the previous year. Daimaru Matsuzakaya Sales Associates were absorbed by Daimaru Matsuzakaya Department Stores in absorption-type merger as of September 1 this year. Operating profit increased due to impacts such as posting and other revenue associated with the merger of Daimaru Matsuzakaya Sales Associates exclusion of J. Front Foods, which booked loss in the previous year from consolidation through business transfer. Consolidated statements of financial position are shown on Page 11. Total assets decreased JPY 30.6 billion from the end of the previous fiscal year, partly due to depreciation and sale of all shares of Neuve A. Interest-bearing liabilities decreased JPY 8.6 billion from the end of the previous fiscal year due to repayment of lease liabilities. Net D/E ratio excluding lease liabilities was 0.69x. Please go to Page 12. Operating cash flow decreased JPY 2.4 billion year-on-year due to increase in working capital as well as decrease in operating loss. Free cash flow was up JPY 3.9 billion year-on-year, partly due to successful reduction of investment. Let me move on to forecast for the second half and full year for fiscal year 2021. Page 14, please. The impacts of COVID-19 are prolonging far beyond our expectation. We cannot deny possibility of the sixth and the seventh waves in this situation. On the other hand, in Japan, vaccination is accelerating rapidly among wider generations and the ratio on people who were vaccinated twice already exceeds 60%. Demonstration experiments also started to ease restrictions on travel. I think the environments are being created to get back to normal. In light of the trends in other countries, assuming restriction on entry of inbound tourists to Japan will not be eased in current fiscal year. We now expect full-scale recovery of consumption by inbound tourists will start in fiscal year 2023 onwards. Assuming such a base scenario, we set the plan for the second half to work hard. However, we also prepared multiple scenarios in preparation for worsening situation. By considering optimal measures such as additional measures for group structure reform, we would take flexible response to reduce risks. Page 15, please. For fiscal year 2021, we forecast gross sales will be JPY 922 billion, up 19.8% year-on-year. Business profit will be JPY 12 billion, up 407%. Despite cost for structural reform assumed in this fiscal year, operating profit will turn positive to JPY 5.5 billion. Profit attributable to owners of parent will turn positive to JPY 1 billion. Forecast for all profit items, including business profit, operating profit and profit attributable to owners of parent remain unchanged from June forecast. We plan to pay year-end dividend of JPY 15 per share, down JPY 3 year-on-year, resulting in annual dividend of JPY 29, including interim dividend, up JPY 2 year-on-year. Next, segment performance forecast. Please look at Page 16 for Department Store business. We expect sales will recover from late third quarter to fourth quarter and recovery of domestic consumption will accelerate month after months. It would take quite a lot of time before inbound sales will recover and we expect inbound sales in the second half will remain at the first half level. For the second half, gross sales will increase 17.1% year-on-year. Both business profit and operating profit will turn positive. Quarterly major store sales forecast is as shown on Page 17. Please look at Daimaru Matsuzakaya Department Stores SGA analysis for the second half on Page 18. Due to first scale business activities, total SGA will increase JPY 3.8 billion year-on-year. Out of that, an increase of personnel expenses will be JPY 4.3 billion. The major factor is the merger of Daimaru Matsuzakaya Sales Associates on September 1. On the other hand, outsourcing expenses included in other expenses will decrease. SGA reduction effect of the merger is expected to be JPY 200 million. SGA will increase about JPY 500 million from fiscal year 2019. Personnel expenses decreased JPY 4.1 billion temporality due to revision and retirement benefit system in fiscal year 2019. Therefore, if it is taken into account, personnel expenses will decrease JPY 3.6 billion in real terms. Please go to Page 19 for SG business. Free contribution of Shinsaibashi PARCO and year-on-year significant reduction of rent concessions are incorporated in the forecast. On the other hand, the impact of exclusion of Neuve A from consolidation on revenue will be negative JPY 6 billion. As a result, for the second half, gross sales will decrease 11.9%, but both business profit and operating profit will increase significantly. Please go to Page 20 for Developer business. Real estate rental business, including development of new properties is expected to steadily contribute to revenue. Revenue will increase 46.9% and both business profit and operating profit will increase significantly partly due to strengthening of properties in major cities in Design & Construction business. Page 21 shows Payment & Finance business. We will strengthen efforts to acquire new customers in department stores and by promoting online sign-up. In addition, by increasing transaction volume through campaign and others, revenue will increase 31.6% and business profit and operating profit will turn positive in the second half. In other segments shown on Page 22, revenue will decrease 2.1%, and both business profit and operating profit will decrease in the second half as this core company, Daimaru Kogyo, is expected to struggle with tight supply of semiconductors and others. Consolidated statements of financial position are as shown on Page 23. Net D/E ratio excluding lease liabilities will be 0.68x. As we recognize about 0.6x as the appropriate level, we will take appropriate responses by watching changes in business performance going forward. Cash flows are as shown on Page 24. We intend to secure free cash flow of JPY 33 billion through reduction of investment revenue from sale of assets and others. We will continue to secure enough cash reserves until COVID-19 comes to an end. Next, I will explain progress of medium-term business plan started in this fiscal year. Page 26, please. In the current medium-term business plan in light of strength of the group and mid- to long-term environmental changes, we are working on initiatives, focusing on 3 major strategies: including real digital strategy; prime life strategy; and developer strategy. Page 27, please. Firstly, we will achieve full recovery and generate operating profit of JPY 40.3 billion, which exceeds pre-COVID-19 level in fiscal year 2023, the final year of the current medium-term plan for regrowth in fiscal year 2024 onwards. Page 28 shows the process to full recovery in the current medium-term plan broken down into operating profit by segment. As you can see, clearly, the main factor behind the unprecedented crisis the group faced was a structure overly dependent on real store-centric business, which was not able to respond to these rapid changes in the environment. In particular, Department Store business dropped sharply. We need to increase profit by more than JPY 40 billion from a loss of more than JPY 20 billion in fiscal year 2020. Full recovery of the group cannot be achieved without recovery of Department Store business. However, we shouldn't misunderstand here. That is to say, the main reason for the challenging situation, department stores are currently facing is not COVID-19 at all. Even if we wait for COVID-19 to come to an end, it is clear the situation will not become normal again. The fundamental issue of department stores is delay of business model transformation, driven by rapid environmental changes caused by COVID-19, the very issue was exposed again. Page 29, please. With COVID-19 as a trigger, what will recover, what will not recover and what will further grow are becoming very clear. Polarization in consumption patterns is expected to progress further. Consumption by affluent people is assumed to be more active. It is definite differences among categories will be more apparent. With COVID-19 as a trigger, it became a clear response to these market changes will be difficult in the current business structure overly dependent on real stores. On the other hand, reckless expansion of e-commerce separated from real stores will not lead to sustainable value creation with the use of strengths of the group. The sources of the group's value creation are: curation capabilities; centering around real stores; store-based presentation capabilities; and people above all. All of these are transmitted through real stores, which are medior as for unique additional value and create sympathy. In other words, by the election, the group aims at OMO meaning we will merge digital with a real while utilizing strengths of the real. Page 30, please. In promoting digital shift app is becoming more important as touch points with customers. The number of app users of Daimaru Matsuzakaya Department Stores exceeds 1.12 million currently, and utilization status of customers is quite high. Spend per app user among in-house cardholders is 2.5x as high as that of those who do not register the app. Rate of utilization is 75.9% of users' annual sales exceeds JPY 175 billion. I think we will be able to sophisticate CRM further by centralizing management of customer information and purchase information through single sign-on and promoting alliances. For further pursuit of results, we aim at increasing the number of app users to 2.4 million people for fiscal year 2023. Page 31, please. We aim at JPY 40 billion of online sales through OMO shopping and others, one of the indicators of digital transformation in the current medium-term plan. Out of that, we assume sales through Gaisho's Connaissligne and others will be JPY 10 billion. By category, JPY 30 billion will be from cosmetics, art, luxury and food, in which we can demonstrate our characteristics. JPY 10 billion will be from gift in which we have strength. These numerical targets do not deny significant shift from the real to digital in customer journey. At the same time, I think there is sufficient potential to create big opportunities to cultivate new markets beyond the constraints of time and space. I will introduce progress and achievements of specific OMO initiatives from which such potential may be felt. Page 32, please. The essence of OMO in our mind is expansion of human power using digital technologies. We are currently building OMO shopping sites, utilizing such strengths and characteristics. One of them is DEPACO, cosmetics OMO shopping site. In-store and online similar purchase experiences will be realized. At the same time, it will be a unique site with media functions to provide attractive information for customers. We plan to launch it in February 2022. We don't assume full recovery of inbound cosmetics market even in fiscal year 2023. We want to cultivate and expand the domestic market with this new initiative. We aim at online sales through DEPACO of JPY 5 billion in fiscal year 2023. Also in art OMO site, we achieved higher results than our expectations through POC 2x. We are making preparations for release early in 2022. Page 3, please. Unique Gaisho business of department stores has a strong image as real store-centric business depending on individual skills. But I realize every day that the business has more affinity to online on our expectation. One of the examples is Connaissligne, a close site for Gaisho customers, which is activated as our new touch point. The number of members of the site currently exceeds 80,000. The eye-catching fact is that the site is expanding purchase opportunities, our relatively young department store customers. In the first half, purchase share of Gaisho customers in their 20s to 40s, increased 4.2 points. That is because customers of generation familiar with digital, purchase actively modern arts or rare products through Connaissligne. In September, this year, mechanism for online customer service was introduced to the site. In this way, Connaissligne is evolving itself as a new winner in our department store business. We aim at JPY 10 billion of online sales in gaisho activities, such as Connaissligne and live shopping for fiscal year 2023. While working on initiatives for digital shift, I think we need to drastically overhaul content provided in real stores and for allocation. Page 34, please. The specific initiatives we are considering include decrease of originally curated space by half, further decreased awareness, volume zone growth in expansion of prime content and shift our forecast to lifestyle and experience. We give priority to expanding content that make strength stronger in the period of the current medium-term plan. The direction shown on this slide is embodied with overwhelming sense of scale and quality in transformation of Nagoya store into hybrid business model. Please go to Page 35. One of the characteristics of Nagoya store is overwhelming strengths in gaisho. The current share of gaisho sales to the store sales is about 40%. We want to increase this to 50% and achieve top position of Gaisho business in terms of assortment, service and space quality. Another characteristic is JPY 3 billion structure, consisting of main, North and South buildings as is the case with Shinsaibashi store, which is taking a lead as a hybrid department store. We will build highly profitable department store model with optimally balanced mix of kaitori Shiire purchase and a non-return basis and Shoka Shiire purchase recorded at the time of sale and fixed-term release using the 3 building structure. We'll make sure to start business model transformation at Nagoya store during the current medium-term plan period to achieve big and early results in the next medium-term plan period. Page 36, please. In March this year, we entered Subscription business and other address. Fortunately, the business made a good start. We support for more customers than we expected. Many customers are currently waiting to start using the service. But now we can say for certain that we will guide members to the service without keeping them waiting. At present, the business targets fashion for ladies. Going forward, we are also intending horizontal expansion based on this business as a platform to expand subscription market. Page 37 shows SG business of PARCO. To enhance the appeal of stores, PARCO is promoting development and expansion of new content embracing changing times. Specifically, PARCO entered the medical mall development and operation business as a new business in the wellness area and will open [WOPA] which will seamlessly handle medical care, product sales and services in Shinsaibashi PARCO in November. At [WOPA], PARCO as a business entity undertakes development jointly with business incorporating partners and invites clinics and product sales and service operators that share the philosophy of this business to each site for operation. We will study results of this first mall, which will open in Shinsaibashi PARCO and consider introducing it to other PARCO stores and Daimaru Matsuzakaya stores across Japan. Page 38 shows Payment % Finance business, earnings structure of JFR Card in Payment & Finance business is currently changing dramatically through card renewal in January this year. Please be aware that accounting method for annual membership of JFR Card will change in the second half of last year. Adjusted business profit and operating profit will recover to around JPY 2.6 billion in this fiscal year and reach almost JPY 3 billion in fiscal year 2030. There are 3 strategic features in the current medium-term plan, including expansion of payment business, promotion of merchant business and expansion of insurance and finance business. While we're checking and monitoring points every quarter, we will build strong management foundation for leave forward in the next medium-term plan. Page 39 shows Developer business. For Developer business, the period of the current medium-term plan is an upfront investment phase. In particular, the key to regrowth in and after the next medium-term plan is Nagoya Sakai area and Osaka Shinsaibashi area. Due to the timing of project disclosure, the maps in this slide are not sufficiently described. However, preparation for these 2 key development areas are making steady progress. I hope department store and PARCO will jointly create various attractiveness to show exclusive strengths of the group. Next, I will talk about progress of the group structure reform on Page 40. Structural reform is promoted from 2 viewpoints, reduction of fixed cost through business model transformation and narrowing of business space. We will reduce fixed costs by JPY 10 billion in fiscal year 2023, the final year of the medium-term business plan from fiscal year 2019. We plan to reduce JPY 3.7 billion out of that in this fiscal year and are progressing as planned. We'll continue to consider uncertain business environment, study additional measures and accelerate the group structure reform. Lastly, please look at Page 41. We've been fighting with COVID-19 for more than 1.5 years. I guess nobody could forecast the fight would last for so long. On the other hand, as is notable from trends of our stores from May to September onwards, I'm fading moves to get back to normal are steadily seen in various scenes. We understand the group is entering into a phase to look forward, purposefully, coexist with COVID-19 and accelerate initiatives in anticipation of post-COVID-19 era. Not to speak of pandemic like COVID-19 this time, unexpected events will surely happen in the future. I think it is extremely important to minimize unexpected events and control them within expectations. Therefore, we need to be more resilient to change. If we are at the mercy of environmental changes, we will lose energy to be directed to mid- to long-term vision. It is indispensable to break out of our old and fixed shell covered by success experiences and to be determined to change seriously, no change, no full recovery. Without looking away from essential issues, we will address them head on, realize sustainability of both the company and society honestly at a higher pace and make sure to work on transformation on a different level. In the appendix, new medical data showing quarterly literal active adjustment of results for fiscal year 2020 associated with adoption and new segments in this fiscal year, the fixed cost reclassified due to strong closure of major subsidiaries are posted on Pages 43 and 44. So please refer to them later. Thank you very much for your attention.